Now a day's financial manager play a vital role in solving difficult problems in management. Present views in financial management deal a new meaning in decision making policy in the management.
Presenting usefull data is the chief purpose of accounting, which is useful for the person within the organization i.e.; owners, management, employees and also outside the organization i.e.; investors, creditors, government, consumers, etc.
Financial accounting is concerned with record keeping directed towards the preparation of income statement and financial position statement. It provides information regarding profit and loss of the enterprise and also its financial position as on that particular date. Main functions of the business are maintained with the help of the data which is provided economics, management, manufacture and marketing, but details regarding operating efficiency to their lacking financial statements are mainly concerned with the management's interest in future of the organization. Capability of the company in gathering the funds which are necessary and used by the business were implicated by the financial performance.
Therefore, the financial performance is concerned with the appraisal of the following:
- Capital formation
- Capital structure
- Profitability and profit allocation
- Working capital and liquidity management
It is defined as the method of shaping the major financial features of a firm from its accounting and financial statements. Main aim of this analysis is to verify the effectiveness of the firm's management which can be seen in the financial records and reports. Liquidity and profitability of the firm are measured by the help of the financial analysis and is used to know whether the business is performed in a rational way or not.
It is one of the financial analysis methods. It is the most powerful tool of financial analysis. Financial statement plays a decisive role in setting the frame work of managerial decisions for the financial statements viz; income statement and balance statement are prepared to help the management in taking decisions.
A ratio is simple arithmetical expression of the relationship of one member to another. Accounting ratios are interrelated and articulated in the mathematical conditions in between the figures which are joined with each other. Ratio analysis shows inter-relationship between the different items in the data.
1. Current ratio:
Current ratio = Current assets / Current liabilities
YearValuesAnswer 2008 50241 / 12919 3.88 2009110470 / 25837 4.27 2010202141 / 38295 5.27
The current ratio is the result obtained by dividing the current assets with current liabilities. Current assets consist of cash and those assets which can be transformed into cash within year such as catalogues, sundry debtors, marketable securities, credits and advances and prepaid payments. Current liabilities are responsibilities budding within a year, as well as creditors, bills payable, accrued payments, bank overdraft, income tax liability, loans and advances and necessities. The company's liquidity position was very low in the early years where as it is very high in the later years.
2. Quick (or) Acid test ratio:
Quick ratio = (Current assets - Inventory) / Current liabilities
Year ValuesAnswer 2008 44474 / 12919 3.44 2009 38935 / 25837 3.82 2010 179072 / 38295 4.67
From the analysis, it is inferred that the company's liquidity position to pay for current liability is high. This result is higher interest cost on networking capital which affects the profitability of the firm.
3. Debtors days:
Debtors days = (Debtors / sales) * 365
Year ValuesAnswer 2008 = (11535/297096.798) *365 = 14.17 Days 2009 = (24222 / 467927.46)*365 = 18.89 Days 2010 = (55366 / 646185.5) *365 = 31.22 Days
The liquidity position of the firm depends on the quality of the debtors to the great extent. This resulted in higher balance in debtors for which company had to pay more interest charges which affected profitability of the company. This can be improved 3 times better as observed in the ratios of well doing firms. This will result in big reduction in interest charges as well as increase in profits. This possible only through better debtors management and optimum credit policy of the firm.
4. Creditor days:
Creditor days = (Creditor / Cost of goods sold ) * 365
Year ValuesAnswer 2008 (12919 / 237677.429)*365 =19.83 Days 2009 (25837 / 389939.55) * 365 =24.18 Days 2010 (38295 / 549629.1) * 365 =25.43 Days
This ratio is a variation of the credit ratio and gives similar indications. It measures the portion of the firm's assets that are financed by creditors. A very high ratio indicates a greater risk to creditors as also to the share holders under adverse business conditions. Similarly, a low ratio is for the creditors in extending credit.
5. Net income ratio:
Net income ratio = (Net profit / sales) *100
Year Values Answer 2008 = (29710 / 297096.798)*100 =10.00% 2009 = (40851 / 467927.46) * 100 = 8.73% 2010 = (49685 / 646185.5) * 100 = 7.68%
This ratio measures the rate of the net profit earned on sales. It creates a connection between net profit and sales in overall measure of the firm's ability to turn pound of sales into net profit, this ratio also indicate the firm's capacity to withstand adverse economic conditions.
6. Gross income ratio:
Gross income ratio = (Gross profit / Sales) *100
Year ValuesAnswer 2008 (59419 / 297096.792)* 100 19.9% 2009 (77988 / 467927.55) * 100 1.66% 2010 (96556 / 646185.5) * 100 7.68%
The gross profit has been arrived by adding the closing stock and subtracting the materials, excise duty, wages and other manufacturing expenses to sales. Efficiency of the production management is replicated by the gross income ratio. This ratio reflects the efficiency with which management produces each unit of the product. When the gross margin in subtracted from 100% we get the ratio of cost of goods to sale
7. Return on equity:
Return on equity = Net income / Share holders equity
Year Values Answer 2008 29710 / 57853 0.51 2009 40851 / 106087 0.385 2010 49685 / 164077 0.30
It is defined as the amount of net incomereturnedas a proportionof shareholders equity.Return on equity is measures the profit of a firm by revealing shares invested by the shareholders. Net income is for the (full fiscal) year before bonus remunerated to common stock holders but after bonus to chosen stock. Shareholder's equity does not contain chosenshares.
8. Cost of sales to sales ratio:
Cost of sales to sales ratio = Cost of sales / Total sales
Year Values Answer 2008 237677.439 / 297076.798 0.51 2009 389939.55 / 467927.46 0.833 2010 549629.1 / 646185.5 0.85
Through the manufacturing expenses percentage of company is less than the industry average the Cost of sales is slightly more than the industry. This can be, because of more depreciation charges or difference in excise duty. Therefore company has to produce goods by effective utilization of fixed assets to bring down the depreciation cost of sales.
9. Stock turnover days:
Stock turnover days = sales / inventory
Year Values Answer 2008 297096.798 / 5767 51.51 2009 467927.46 / 11535 40.56 2010 646185.5 / 2306928.01
A faster stock income also means that the firm gets to make its profit on the stock faster, and so the firm should be more aggressive. However, it will differ between industries and so it is important to compare within an industry.
10. Return on net assets:
RONA = net income / (Fixed assets + Networking capital)
Year Values Answer 2008 29710 / 57853 0.51 2009 40851 / 106087 0.385 2010 49685 / 187146 0.26
Networking capital = Current assets - Current liabilities.
It is the useful measure the profitability of all financial resources invested in the firm's assets. It evaluated the use of total funds without any regard to the sources of funds. Higher the ratio more effective is the firm is using the pool of funds.
11. Sales to net assets employed:
Sales to net asset employed = sales / net asset
YearValues Answer 2008 297096.798 / 57853 5.13 2009 467927.46 / 106087 4.41 2010 646185 / 187146 3.45
Here, Net asset = Fixed asset + Current asset - Current liability.
This proportion is in addition called the earning power of the firm and represents the return of the funds. It indicates how well management has used funds supplied by the creditors and owners. Higher the ratio better is the position of the firm and more efficient of the management in utilizing funds, entrusted to it.
- In the overall of a business is to receive a pleasing return on funds spend in it, reliable with maintaining a sound financial position.
- The position of the company according to ratio is satisfactory in the year 2008 - 2010. That means each year profit had been increased.
- Financial management - M.Y.Khan & P.K.Jain